What are shadow banks, and why are they considered risky during a financial crisis?
Answer (1)
Shadow banks are financial institutions that perform banking activities—like lending and investing—but are not regulated like traditional banks. They include investment banks, hedge funds, insurance companies, and other private lenders. They are called "shadow" banks not because they are illegal, but because they operate outside the regular supervision of central banks or financial regulators.During the 2008 financial crisis, shadow banks played a big role in spreading risk. Unlike regular banks, they didn’t have to follow strict rules about how much money they should keep in reserve or how safe their investments had to be. Many shadow banks heavily invested in risky financial products like CDOs, which were filled with subprime loans.When the housing market crashed, these investments lost value. Because shadow banks didn’t have enough backup funds, they collapsed quickly. Some couldn’t pay their debts, and others stopped lending money. This caused a chain reaction—other banks and businesses that depended on them were also affected.In the Philippines and other Asian countries, shadow banking is still a concern. For example, loan apps or private lenders who operate online might not follow the same rules as regular banks. While they offer quick loans, they can also cause problems if they charge high interest or collapse unexpectedly.Shadow banks can be useful because they provide services that traditional banks may not offer. But during a crisis, their lack of regulation makes them fragile. When they fall, they can damage the whole economy.Shadow banks are risky because they look like banks and act like banks—but they don’t play by the same safety rules. That’s why governments are now working to monitor them more closely, so that they don’t cause another financial disaster in the future.
